Corporate pay ratio plan proves divisive

Almost 1,000 "unique" letters have been sent to the Securities and Exchange Commission since September about the issue. An additional 127,000 form letters have also rolled in.

They come from backers and opponents of a new rule that will require most public companies to disclose the ratio of the total annual compensation of their chief executive to the median pay of "all" of a company's employees.

The SEC is responsible for coming up with the final rules, which were mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The financial reform legislation called for, among other things, the disclosure of a new ratio comparing a company's median annual compensation for employees to that of its chief executive. In September, the agency proposed rules and said it was welcoming public comments on them.

SEC Chair Mary Jo White testified last month before the Senate Banking Committee about Dodd-Frank, including the pay ratio disclosure.

"The commission has received numerous comments on the proposal, and the staff is working to prepare recommendations for the commission on a final rule," she said in her prepared testimony.

In the past, compensation disclosures have focused on the pay of top executives and boards of directors at public companies. In the future, if the median of the annual total compensation of all company employees is $45,790, for example, and the annual total compensation of a CEO is $12,260,000, then the pay ratio disclosed would be 1-to-268, meaning the CEO's annual total compensation is 268 times that of the median of the annual total compensation of all employees.

Industry groups, individual companies, law firms and executive compensation consultants have raised concerns about the complexity of the requirements and the cost to calculate the ratio. They also say it's not important or helpful to investors.

Smaller companies, typically those with less than $50 million in revenue, would be exempt. Also, the SEC doesn't spell out a specific methodology for companies to identify a median employee. It said, for example, that companies may choose to identify the median using all their employees or by using statistical sampling.

Still, compliance costs for some companies could be "substantial," the SEC said in its 162-page document with the proposed rules.

At least one company has put a $2 million price tag on the work.

"All" employees, the SEC said, suggests any full-time, part-time and seasonal worker on the payroll of the company and its subsidiaries, including those who work overseas, who were employed as of the last day of the company's last completed fiscal year.

"It's a tremendous undertaking for any large international company with no concomitant benefit to its shareholders," Bob Murphy, a former SEC lawyer who is senior counsel at the Dykema law firm in Washington, told the Tribune.

Still, he believes that the final rules will be adopted this year "substantially as proposed," with the pay ratio disclosure required in 2016 proxy statements.

"I think that there is very little chance that it won't get adopted this year," Murphy said.

The annual meeting season is about to get into full force, but it will likely be a couple of years before the ratio begins showing up in proxy statements, agrees Aaron Boyd, governance research director for Equilar Inc., a Redwood City, Calif.-based executive compensation research firm.

Even if the SEC declared the final rule effective in a few months, companies typically begin their fiscal years Jan. 1, meaning the rule might not apply until the 2015 fiscal year, with proxies for that year showing up in spring 2016.

"We're still a ways away from seeing this in proxies," Boyd said. "We need to see to the final rule first."

Here are excerpts from four letters written to the SEC by Chicagoans:

Michael Sacks

Chief executive of Grosvenor Capital Management of Chicago

Grosvenor is an adviser to about 550 investors and manages $45 billion in such asset classes as hedge funds, private equity, infrastructure and real estate.

"Grosvenor believes that income inequality and a shrinking middle class are real and important issues that our country needs to address," wrote Sacks, who is the top outside adviser to Chicago Mayor Rahm Emanuel.

He said he believes that transparency is good, and thatthe disclosure of a pay ratio "can be helpful in allowing investors to more accurately judge the effect of pay structure on company performance, inform investors' votes on executive pay and help regulators and policy makers assess risk."

"Grosvenor is pleased to support the proposal and to call for its adoption," Sacks wrote.

Ivonne Cabrera

General counsel to Dover Corp. of Downers Grove

Dover is a diversified global manufacturer that has annual revenue of about $8 billion. It had 39,000 workers in 41 countries when it submitted its comments to the SEC in November.

"In the United States alone, Dover maintains more than 110 separate payrolls and 129 unique retirement programs with varying benefits," Cabrera wrote in a letter exceeding three pages. "Moreover, to compensate its diverse and global employee population, Dover maintains 647 different global compensation and benefit programs, with variations on base salary, bonus, commission, overtime, retirement benefits and long-term incentives.

"Given the administrative complexity of Dover's global operations, Dover estimates that its annual cost to collect required data would exceed $2 million under the proposed rules.

"This estimated figure relates only to the cost of compiling Dover's compensation data and does not even include the cost of accounting and legal assistance that will be required in connection with the calculation and disclosure of the pay ratio.

"Dover believes that any amount spent on collecting data, calculating the ratio and preparing the necessary disclosures would be better spent on investments in new markets, products and equipment for the benefit of its shareholders.

"No investor or adviser has requested such information from Dover."

But if public companies must disclose a pay ratio, Dover had several suggestions for the SEC.

The final rule should exclude employees outside the United States, it said. About half of Dover's employees work outside the United States.

Besides having hundreds of compensation and benefit programs worldwide, "Dover provides its international employees with many" benefits required by statute in those countries "whose value will be difficult to compare with U.S. benefits."

"Given Dover's vast international operations, Dover believes any attempt to provide one measure of the compensation of its global workforce would be a virtually impossible undertaking."

As one alternative, Dover suggested companies be allowed to calculate the pay ratio using only cash compensation, excluding benefits.

Jay Rehak

President of the board of trustees of the Chicago Teachers' Pension Fund

The fund is an institutional investor with more than $10 billion in assets.

Its board of trustees voted unanimously to support the law requiring the pay-ratio disclosure, Rehak wrote to the SEC, saying it will help its nearly 60,000 participants and retirees, as well as small and large investors nationwide.

It also made many of the same points as the Illinois Teachers Retirement System and the International Union of Bricklayers & Allied Craftworkers Administrative District Council 1 of Illinois.

They all say that the ratio of CEO-to-worker pay at individual companies is material information to investors.

"High pay disparities inside a company certainly can and do hurt employee morale and productivity, and have a negative impact on a company's overall performance," Rehak wrote. "Moreover, disclosure of the median employee pay will help investors better understand companies' overall compensation approach to developing their human capital."

The ratios will be an additional tool for helping investors decide whether to vote for a company's executive compensation package, they said.

"Investors will be able to see how the ratio changes over time at individual companies and to compare companies within industries."

They also agree that companies need to include all workers in their calculations.

"Many publicly traded companies employ a majority of international employees or part-time employees.

"Investors will receive an incomplete picture of their company's pay practices if these employees are excluded from the disclosure."

Karl Muth

Lecturer in economics and public policy at Northwestern University

"I question not only the wisdom of offering a firm's investors — and the public, journalists and others — a ratio difficult to compare between firms, but also the wisdom of Congress and the SEC's decision to implicitly endorse the relevance of such a ratio by forcing its announcement and inclusion in public filings."

He said he has studied CEO pay "in some detail."

"There is no empirical evidence that CEO pay relative to median worker pay is an indicator of CEO effectiveness, or, for that matter, a median worker's effectiveness, nor that CEOs who are highly paid relative to median workers are uniformly more able, or less able, to defend and assert the interests of shareholders.

"Further, there is no evidence that CEOs that receive pay packages several orders of magnitude less … are somehow better, more virtuous, more kind to workers, or, perhaps most importantly, more able to represent the interests of the company's shareholders.

"Suppose a firm pays the CEO half of what the median worker earns. Another firm pays the CEO five times what the median worker earns. Another firm pays the CEO 500 times what the median worker earns. What does this tell you about these firms? It tells me very little, and if I were marking a final exam in an economics or public policy course I teach, I would be highly skeptical of a student's answer if he or she claimed these ratios alone were meaningful.

"Let's take your annual salary of $165,300 as chair of the SEC. If the median worker at the SEC makes $50,000 or $75,000, does this change the reasonableness of your compensation? Does it change the reasonableness of that person's compensation? Or if you were to view the entirety of the federal government, is it reasonable to compare the $400,000 salary of President (Barack) Obama to the median federal worker's salary or to your own salary? Is that ratio important in evaluating the performance of any worker? I think not."